Winning the holiday price war

It’s not as hard as many small online retailers think, says the founder of RightBid.

With the holiday shopping season on the doorstep and millions of shoppers making preparations for Black Friday and Cyber Monday, retailers will be competing aggressively to offer the most appealing deals to consumers. Which retailers are most likely to offer the best bargains? And what’s the best pricing strategy for smaller e-retailers seeking to compete with their larger rivals?

To address these questions, I ran 3,005 of the best-selling products from Amazon.com through RightBid’s price-collection software on Nov. 16 and collected over 27,000 price points. The data come primarily from leading comparison shopping engines such as Google Shopping, PriceGrabber, and BizRate.

In these environments, even a small change in price should lead to big changes in sales. In their 2009 paper Clicks, Discontinuities, and Firm Demand Online, economists Michael Baye from Indiana University, John Morgan from UC Berkeley, and Rupert Gatti and Paul Kattuman of the University of Cambridge conclude that for each improvement in rank on a comparison shopping site, a retailer is likely to see a 60% jump in referrals and ultimately sales through that channel. With price competitiveness so crucial to performance through these channels, how do big retailers fare?

For every product, each merchant was given a percentile rank between 0 and 100 representing how its price compares to competing merchants. A percentile of 0, means the merchant has the lowest price of all retailers observed, a percentile of 100 would indicate the highest price. Percentile scores under 50 indicate lower prices than those offered by the median merchant. The table below shows how some of the largest e-retailers fared, ranking them from those with the lowest prices to those with the highest:

While most of the scores fall between 40 and 60, this range represents a surprisingly large gap between prices. A score of 40 could mean that half of all prices are at the 30th percentile and half are at the 50th percentile, while a score of 60 could mean that half of all prices are at the 50th percentile and half are at the 70th percentile. Given that there were on average 9.3 sellers per product, being at the 40th percentile is on average 0.8 ranks ahead of a seller at the 50th percentile. Using Baye et. al’s estimate we would estimate that the retailer at the 40th percentile (Amazon) should see a 50% higher referral rate from these channels than a merchant at the 50th percentile (Walmart) and a 125% premium on a merchant near the 60th percentile range (Overstock.com). Given Amazon’s brand reputation, the difference in referrals is likely even larger.

How does a small retailer beat a giant like Amazon that already has relatively competitive prices? The short answer is simply to slash prices everywhere. A smarter answer would be for the small retailer to pick its battles. Small price changes can lead to substantial improvements in rank, which should lead to large changes in referrals and sales.

In a similar study based on data from PriceGrabber, the typical product had a 2.7 percentage point gap between the two lowest prices—one-quarter of all products had less than a 0.7 point gap between these prices. Retailers who can identify and act on these opportunities should see significant growth in their sales from customers shopping through comparison channels.

Many smaller online retailers are not taking advantage of the opportunity to grow their sales by making relatively small changes to their prices. When I speak with small retailers through my work with RightBid, I’m always surprised when I hear how many typically change prices infrequently or only as a result of an underlying cost change. With retailers putting much of their focus on increasing their visibility this holiday season, small tweaks to prices can be a gift unto itself.